by Bert Whitehead, MBA, JD Franklin, MI
To get a new mortgage or refinance at the lowest rates, you must show that you “qualify” for the mortgage. Here is a quick summary of the stan¬dards banks seek:
- Clean credit record (FICO score = 700+). FICO scores are the credit scores most lenders use to determine your credit risk.
- 80% loan-to-value (LTV). The mortgage should be less than 80% of the value of the home.
- Currently employed.
- Monthly payments on current debts (including mortgage) less than 40% of income.
There are some exceptions to these standards. For example, if you replace a mortgage on your primary residence and you have always made the payments, some banks let you refinance 90 to 100% of the home’s value. But, in general, you won’t get the best rates available unless you meet the criteria just listed.
Mortgage financing is a very competitive field, so check with at least three banks or mortgage companies. Rates move daily, so it’s preferable to call all three institutions on the same morning. I suggest that clients request a quote on “a 30-year fixed-rate mortgage with no points, no prepayment penalty, and with the closing costs rolled in.”
Be aware that even with no points and no prepayment penalty, there will still be certain costs that you are expected to pay at the closing. The appraisal fee, for example, is an out-of-pocket cost to the lender. Property taxes also have to be paid as well as interest payable from the date you close to the beginning of the next month. Many people prefer that property tax and insurance costs be “escrowed” so that an amount is added to the monthly payment to pay for these costs as they come due.
Having your closing costs rolled into the mortgage means adding any costs that are normally due at clos¬ing to your mortgage balance. The cost of those will be covered by your monthly payment. You should ask each lender to e-mail you a “good faith estimate” of the mortgage they propose. Then you can verify that the terms offered are those you requested and compare the closing costs.
These are the most common stumbling blocks that clients encounter:
- The house doesn’t appraise high enough. You can get your own appraiser to see if the bank’s appraisal is wrong, but they won’t accept it to lend you money. If it is under-appraised significantly, you might apply at another lender and they will have it appraised again. Although there can be wide variations in appraisals, there are no guarantees.
- Unanticipated black marks appear on your credit score. You have to contact the credit bureau to correct these.
- Your income is insufficient. This often happens to retirees who live on investment income. We have clients set up a monthly transfer from their investment ac¬count to their checking account for the same amount each month on the first of the month. If you do this for a few years, lenders will accept these transfers as a reliable stream of retirement income.
Don’t let lenders talk you into a shorter term or adjustable rate mortgage, which can be more profitable for them. Other mortgage options that may seem attractive have a lower interest rate. But a 30-year mortgage has three huge advantages:
- You receive the lowest payments so you have more cash flow.
- Because mortgage interest is tax deductible, a longer mortgage provides more tax shelter than shorter term mortgages at a lower rate.
- Most importantly, a 30-year fixed-rate mortgage is your best protection against inflation.
By the way, if any of the offers sound too good to be true, that likely is the case. But be sure to pay attention to any offers made by your current lender. They want to keep their customers happy, so you might find some excellent offers made by a relationship that is already in place!